5. The affordable market is always active (especially during turbulent times)
There is no shortage of Section 8 voucher holders. Beside Section 8, other programs provide landlords attractive incentives to provide housing options for lower income citizens. City FEPS guarantees 5 years of paid rent for tenants and even pays for the first year upfront along with a $5,000 bonus. In New York City, this could translate into a rent prepayment check of over $20,000 per unit. As the economy turns for a bear market, layoffs become inevitable, which creates a domino effect, flooding the rental market with potential tenants. For a single Section 8 apartment in New York City, a landlord can expect up to 30 applications within a week.
4. Simple underwriting
Since affordable housing rents generally remain steady, the underwriter’s job of determining value is much easier versus luxury housing, which tends to have high fluctuating rents. There are no magic numbers needed to make these deals work.
3. Guaranteed income
Nothing in real estate is guaranteed, except that Section 8 rent check from the government! Let’s think back to 2008 when thousands of high-income workers were laid off, which caused a shockwave throughout the luxury space. It’s true that the margins are higher with top tier product, although the resistance to sharp market downturns is not as resilient as the affordable space. Even in the scenario where your Section 8 tenant loses their job, at least the landlord will still collect the lion-share of the rent through the government agency.
2. Stability is a key characteristic
Income from affordable housing is generally predictable since the city determines the maximum allotted amount per unit that landlords can charge. For example, in New York City, the maximum amount for a 1BR Section 8 voucher is $1,851. In many neighborhoods throughout New York City, there is positive arbitrage between the amount landlords can charge in the free market and the Section 8 allotments. For example, in East New York, Brooklyn, free market 3BR units can be found for just under $2,000, while a 3BR Section 8 voucher amount is $2669. That’s an additional $8,000 per unit that a landlord can collect by going Section 8.
1. You’re helping people who need help the most. You’re officially a part of the solution
The best reason for investing in affordable housing is that you will become an active player in attacking a serious national crisis. According to Harvard University’s 2019 State of the Nation’s Housing Report:
“More than 18 million households — 1 in 6 — are paying more than half of their income on housing and are considered severely cost-burdened. The largest share of these households includes 9.5 million renters earning less than $30,000 per year and 5.4 million homeowners earning less than $30,000. Severe cost burdens also affect 1.1 million homeowners earning between $30,000 and $44,999, 927,000 renters earning between $30,000 and $44,999, and 731,000 homeowners earning between $45,000 and $74,999.
We’re experiencing high rates of housing unaffordability because rising rents and persistently high home prices are undercutting slow gains in income. Overall, rents were up another 3.6% in 2018, and home prices were near their highest levels since 1980, adjusting for inflation.”
FACT! There is a significant void within the affordable sector. We do not need any more luxury hi-rises. The time has come for all smart investors and developers to solve the nation’s housing crisis. Rent rolls may not break any records although the financial outcomes can still be lucrative. That’s a WIN WIN!